9 Tax-Smart Moves To Make the Year Before You Retire

The year before retirement often carries more financial weight than most realize. After decades of saving and investing, this final stretch is a chance to shift from simply building wealth to making strategic choices that could ease your tax burden in the years ahead. Minor adjustments now (like rethinking contributions, exploring conversions, or weighing where you live) can make a meaningful difference once your paycheck stops.

Here are some tax-smart moves that could help you maximize your retirement savings.

The year before retirement is the last chance to take advantage of catch-up contributions. If you're 50 or older, you could add an extra $7,500 to a 401(k) and $1,000 to an IRA on top of the standard limits.

These contributions don't just grow your nest egg. They also lower your taxable income in your final working year. By matching the higher limits now, you can give your savings a little extra boost.

Shifting money from a traditional IRA into a Roth IRA the year before you retire could be worthwhile. Roth accounts grow tax-free, and withdrawals aren't taxed later.

This can help manage income during retirement. While the upfront tax bill on conversions can be steep, you can strategically spread it out over the year (or several years) to help soften the impact.

Your last working year might be the perfect time to bunch deductible expenses. If you anticipate a lower income once you're retired, consider paying things like medical costs or property taxes now while your income is higher. This strategy is very effective if you're close to the standard deduction threshold.

Where you plan on retiring can also have a significant impact on your after-tax income. States have different tax laws regarding retirement income and estate taxes.

Before you decide to relocate, compare the overall tax landscape (not just income tax rates). A state with no income tax could offset the savings with a higher property or sales tax. Research before you move to avoid unpleasant surprises.

Understanding how RMDs work can save you from unexpected tax hits later, even if RMDs may seem far off now. Starting at 73, you'll have to withdraw a set amount each year from tax-deferred accounts like traditional IRAs and 401(k)s.

These withdrawals count as taxable income and could push you into a higher bracket. It's important to consider how you'll handle RMDs now, before you actually need to handle them.

The final year of work is a smart time to check whether your portfolio still matches your risk tolerance. While you might not want to abandon growth completely, moving too aggressively into stocks could expose you to unnecessary volatility just as you start drawing on your savings.

At the same time, holding everything in cash could limit your long-term growth. Aim for a tax-efficient allocation that helps smooth the transition from saving to spending.

Many workplace perks end once you retire, so consider reviewing them now. Health savings accounts (HSAs), dependent care accounts, and flexible spending accounts can all provide tax advantages, but you may lose access to them when you retire.

If possible, take advantage of them now while you still can to lower your taxable income during your last working years.

A year before retirement is the right time to make sure you're not giving too much (or too little) to the IRS. Adjusting your withholding amount can prevent a large bill or refund at tax time.

Remember, your tax picture will look very different when you retire. Making sure your withholding is in sync can help make the transition smoother, especially if you typically have a large tax bill.

Even the best DIY strategies can miss hidden opportunities (or risks). Consider sitting down with a retirement planner at least once during the years leading up to retirement to find new ways to trim your tax liability.

A professional might suggest strategies like partial Roth conversions, tax-efficient withdrawal plans, or state-specific savings moves. These final years are a crucial time to get personalized advice and make sure your retirement plan is solid.

The year before retirement is a rare window to make wise tax choices that could pay off for decades. The moves you make now can help you live a comfortable retirement later. Having a tax-efficient retirement plan helps ensure that you keep more money in your pocket at the end of the day.

It's also worth noting that the IRA adjusts retirement plan contribution limits each year, meaning that you may be able to put away more each year as you approach retirement. Taking time to plan now can help you avoid surprising retirement mistakes that can derail your financial plans.